When a stock's yield is more than 7%, it's only natural to question whether it's sustainable. After all, if it were truly safe, it would be a bargain buy, investors would buy it up, and as the price would rise, that yield would come down. When that isn't happening, it's a sign that investors are having second thoughts about the payout and whether it really is worth the risk.
Logistics giant United Parcel Service (UPS -1.86%) offers a mouthwatering payout of 7.5%, which is well above the S&P 500 average of just 1.2%. At such a high yield, you might expect it to be on the buying list of all income-seeking investors. But as of the end of July, the stock was down more than 30%. That downward pressure has been pushing the yield higher.
Are investors overlooking a quality dividend stock with UPS, or could its payout really be in trouble?
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What UPS's Q2 earnings numbers say
On July 29, UPS reported its second-quarter earnings for the period ending June 30. The numbers weren't too bad, as domestic revenue declined by just 0.8% to $14.1 billion. And internationally, revenue rose by nearly 3% to $4.5 billion. Demand hasn't taken a big hit just yet, but investors are clearly worried about what lies ahead, as tariffs and trade wars could have an adverse effect on the company's future growth.
A key figure to look at is the diluted earnings per share (EPS). It came in at $1.51 for the most recent quarter, down from $1.65 a year ago. That's a problem, because UPS's dividend is $1.64 per quarter. That means, based on its current level of profitability, its earnings are not strong enough to support the dividend.
And if there's a slowdown in business in the future and profits decline even further, that will only exacerbate those concerns. And UPS isn't hiding the fact that there is plenty of uncertainty -- it isn't providing investors with any guidance this year related to revenue or operating profit.
Is a dividend cut inevitable for UPS?
Management didn't provide guidance for revenue or profit, but it did say it expects to make dividend payments of around $5.5 billion this year, which would suggest the payout is safe. However, it did state that it was subject to board approval. In a constantly evolving macroeconomic picture, it's understandable that UPS isn't offering firm guidance with respect to its financials or even its dividend payments right now.
U.S. President Donald Trump has also recently issued an executive order to suspend duty-free de minimis exemptions for all countries. Previously, the de minimis loophole allowed online retailers from other countries to ship low-cost goods into the U.S. without worrying about duties and tariffs. Now, however, that loophole is closed, and that could negatively impact UPS's international business, which was a bright spot this past quarter.
Based on these developments and the fact that there's still plenty of uncertainty around tariffs, I wouldn't hold my breath that UPS will be able to recover anytime soon. The worst could be ahead for the company's financials, which may put even more pressure on a dividend that is already looking unsustainable; a dividend cut could indeed be inevitable for UPS.
Should you consider investing in UPS despite all the tariff uncertainty?
UPS is a leading logistics company, but with many potential headwinds to worry about these days, it's difficult to be bullish on the stock. If you're a long-term investor, you may be tempted to buy it, given that it's trading at only 13 times its trailing earnings, but you'll need to brace for the reality that it could be a bumpy ride for the foreseeable future.
I'd suggest keeping an eye on the stock and putting it on a watch list, but I wouldn't buy it just yet, as a dividend cut could send it into an even deeper tailspin. While UPS's yield looks attractive, it's not a safe payout to rely on right now. There are many other safer dividend stocks to consider instead.
